Modelling of institutional changes in transition countries -the gap between the theory and practice

(1)

Veselin Draskovic, Evgeny Popov, Kęstutis K. Peleckis / Montenegrin Journal of Economics, Vol. 13, No. 1 (2017), 125-140

‘

Modelling of Institutional Changes in Transition Countries -

the Gap Between the Theory and Practice

VESELIN DRASKOVIC

1

_{, EVGENY POPOV}

2

_{, and KĘSTUTIS K. PELECKIS}

3

1 _{Professor, University of Montenegro, Mritima faculty, Kotor, Montenegro, e-mail: [email protected]} 2_{Professor, Ural Federal University named after the first President of Russia B.N.Yeltsin, Ekaterinburg, Russia,}

Head of the Centre of Economic Theory Institute of Economics, Ural Branch of the Russian Academy of Sciences, e-mail: [email protected]

3 _{Lecturer, Vilnius Gediminas Technical University, Lithuania, e-mail: [email protected]}

A R T I C L E I N F O

A B S T R A C T

Received September 01, 2016

Received in revised from October 19, 2016 Accepted January 21, 2017

Available online 15 March 2017

The first part discusses the consequences of the deficit of real institutional changes in post-socialist SEE countries, and their sub-stitutions by the various anti-developmental institutional imitations, which essentially had the character of alternative quasi-institutions and were in a function of enrichment for the privileged individuals. It points to the importance of neo-institutional economic theories (NET), which provide a sound grounds and recommendations for explanation of the imitation changes, which had anti-institutional and development character. Theoretical explanations of anti-institutional changes confirm the conclusion that real anti-institutional changes can not be developed on its opposites, in the conditions of feigning the economic freedom and democracy, the governement stability, and the accompaning development of social pathology. The present paper is dedicated to the formation of a theory of institu-tional modelling that includes principles and ideas that reflect the laws of societal development within the framework of institutional economic theory. The scientific principles of institutional modelling, increasingly postulated by the classics of institutional theory, are discussed. Scientific ideas concerning institutional modelling are proposed on the basis of the results of original design, formalisation and measurement of economic institutions. Applied aspects of the institutional theory of modelling are considered.

JEL classification: B52; D02; O17; P37; DOI: 10.14254/1800-5845/2017.13-1.9 Keywords: institutions, institutional modelling, transaction costs, institutional design, formalisation of institutions

Montenegrin Journal of Economics

(2)

“Negative externalities will not disappear by itself.”

F. Fukuyama

INTRODUCTION

Transition in the SEE countries was not objectively dependent process, conducted according to specific transformational paths. It has spawned different gnoseological levels, with uncertain cri-teria for the assessment of human behavior (especially economic), with undefined development objectives and strategies, in the conditions of social and economic instability, and a range of op-portunistic behavior. This process did not have a elaborated, complete, and consistent theory that would in a scientific-methodological way to explain the variety of specific and often mutant prac-tical phenomena. One of the dominant phenomenon was the formation of imperial rhetorical facade, which has enabled a long-term substitution for developing the material and human values (money).

Throughout the history of society there was an existing development paradigm with the ap-propriate criteria and value systems, which have always been associated with the interests. However, in most transition countries the neoliberal anti-development (essentially: crisis) paradigm was formed. Its basis was immoral, inhumane, and dogmatic ideology of political robbery (Oppenheimer, 1922). A hegemonic (greedy) order, raised on this foundation was imposed by the nomenclature of government, due to the realization of privileged interests of self-appointed elite. Elitist dirigisme (based on socialist) had a dominant party-state prognostication. It paradoxically appeared on the apologetic criticism of state dirigisme. Proclaimed mass was replaced by privileged individualism. In addition to the many abuses and negative practical manifestations, the paradoxical, ideological and contradiction context of neoliberalism had its doctrinal terminological, institutional, developmental, cognitive, strategic, interest, redistributive, ownership, civilizational, geopolitical, or/and geoeconomic sense (Scekic, Draskovic and Delibasic, 2016).

During the period of post-socialist transition, the whole system of anti-institutional and qua-si-institutional factors was established. From the aspect of development these factors had a hin-dering and destructive influence. Therefore, they had a very negative impact on economic growth. The aforementioned factors had a direct synergy effect on the generation creating an institutional vacuum (in the early stage of transition), followed by the long-term conglomerated unsystematic approaches.

1. INSTITUTIONAL CHANGES AND ALTERNATIVES

In academic literature, a detailed research was necessary to explain an adequate theory regarding the current socio-economic situation. Many authors, including M. Blaug (1994, p. 650), claim that NET is suitable for that, because it contains pragmatic and multidisciplinary scientific doctrine, which identifies causes and trends of the transition processes and changes. NET deals with institutions, and institutional changes were supposed to be the most important characteristics of transition (Draskovic, 2017; Draskovic, 2017a; Draskovic, M., Draskovic, V., Bilan and Delibasic, 2016; Draskovic, M., Bauk, Streimikiene and Draskovic , 2017). NET is directly linked with the choice of priority ways of regulating the economy and society, which have practically shown great ability of manipulation, imitation, misuse, improvisation and usurpation. All this happened under the cover of alleged theoretical model of neoliberalism. NET was objectively able to explain many transformational pitfalls associated with:

‒ institutional vacuum,

(3)

‒ antagonism of social subsystems (political, economic, cultural, ethical, social, motivational, technological, etc.),

‒ rapacious privatization,

‒ failed expectations of the people, and ‒ mythical monistic dogma.

Theoretical interpretations (North and Thomas, 1973; North, 1981, 1984, 1987, 1989) indica-te that institutions are generally accepindica-ted rules, norms and mechanisms which contribuindica-te enabling successful functioning of the organizations, as well as the realization of economic, legal, political and other activities. Institutions have several major functions:

‒ regulation, coordination and limitation of human behavior, ‒ reduction of transaction costs,

‒ assistance in adjusting to the change, minimizing risks, uncertainty and entropy, as well as the rational allocation of resources,

‒ stimulation and motivation in the realization, and linking economic relations, resources, subjects and activities,

‒ protection of opportunistic behavior, and ‒ promotion of economic development.

All formal and informal institutions are always complemented by positive normative acts, which regulate the rights, obligations and permitted forms of economic behavior, as well as sanctions in case of its violation (Sueldo and Streimikiene, 2016, pp. 90-105). When all of this is applied, it becomes clear how and why the main transition processes lost control in most of the transition countries. Specifically, under the pressure of the ruling nomenclature, the radical, positive and synchronized institutional changes, recommended by D. North (1994, p. 79) were ignored. This refers to the changes in the attitude and form of business, ownership, control mechanisms, political and normative regime. That way was disabled not only institutional competition, but also the process of establishing a rational, consistent and overall institutional framework, which is a common denominator and a precondition of all other changes, as well as the socio-economic development.

Nevertheless, the transition preserved some forms of institutional transformation. It had an innovative character in the part of transformation and evolution of economic and social order, as well as appropriate transformation and transaction costs. However, instead of eliminating and/or reforming the old (socialist), and building the effective institutions, in the conditions of chronic deficit of the rule of law, numerious recombinant forms of quasi-institutional relations were established (paternalism, monopolistic, lobbyism, social pathology, the informal economy, annuity-oriented behavior, dominance of politics over economics, etc). Their common denominator was the dominance of institutional monism of neoliberal-clan type. Economic development is not possible without an institutional pluralism (North, Walis iand B. Weingast, 2009; Ciegis et al., 2015, p. 106; Drašković, 2014; Erznkyan, Delibasic and Grgurevic, 2014).

Civil war, disintegration of the state, political monopolies, and restrictions imposed on the market were main factors for the flourishing of uncontrolled markets. Institution of market regulation in many areas has been dysfunctional. The long-term multiplication of those conditions has led to the creation of the so-called alternative (shadow, parallel) institutions (Draskovic, Bauk and Delibasic, 2016). They had destructive and selective impact on the use of economic resources. Furthermore, they prevented not only real institutional changes, but also institutional adaptation, institutional control, and institutional competition. It strengthened the specific forms of total control (Goffman, 1968, p. 41) in social and economic flows by the powerful

(4)

nomenclature-Veselin Draskovic, Evgeny Popov, Kęstutis K. Peleckis / Montenegrin Journal of Economics, Vol. 13, No. 1 (2017), 125-140

lobbying clans (administrative-bureaucratic groups - Mc Auley, 1991, p. 26). Phenomenology of clans rested on the alternative meta-institutionalization of highly interest type (i.e. politicians fighting for private rent - Marcouiller and Young, 1995, pp. 630-646; Infante and Smirnova, 2016, p. 216).

Consequently, instead of good rules, some "players" and their "connections" dominated the institutions (Fernandez-Guadano, 2015, pp. 192-200). Public policies (of radical neoliberal type) were directly or indirectly abused - guided by the dominant interests of the nomenclature of the authorities and their lobbyists, which is varified through affirmation of violence in society (North, Wallis and Weingast, 2009). Therefore, they are often marked as quasi-neoliberal. That has deformed and reduced the socio-economic reality (the order), and the overall institutional structure. There was the creation of conglomerate nonsystem (organizational, institutional and normative) was created. In practice, it has manifested through various substitutions.

The market was substituted by monopolies; efficient and massive private sectors by rare and privileged riche; the motivation and competition by privileges; entrepreneurship by rent-oriented (Buchanan, Robert and Tullock, 1980) and gray-economic behavior; democracy by party lobbying, nepotism and log-rolling; political pluralism by totalitarianism of the ruling parties and coalitions; institutions in system and institutional vacuum, etc. In such environment, the socialist vices have become ideals. The cultural values were on decline (Vveinhardt and Andriukaitiene, 2015, pp. 205-210). The implementation of real reforms was - nonsense. Economic results were catastrophic. The crisis was still present in many variations.

1. IMPORTANCE OF THE N.E.T. FOR EXPLANATION OF IMITATION

INSTITUTIONAL CHANGES IN THE SEE COUNTRIES

Institutional imitations, "misconceptions", monistic illusions, and practical phenomenology of anti-institutionalization could be phenomenologically explained by applying unilateral and interests individualism. It is rhetorically, uncritically and vulgarly glorified through quasi-neoliberal mythology (ideology). Appart from being accompanied by non-market enrichment (tendency of privileged interests of minority), essentially it was conflicting. Apparently it was not based on consistency (mass individualism), but on the privileged (rare, minority) individualism. Such improvized

individualism, supported by the nomenclature of government, was and still remains the greatest

opponent of institutional changes. It has led to many practical abuses and deformations (market relations, business environment, competition, etc.), described in the hypothetical "model 23 D" (V. Draskovic, and M. Draskovic, 2012, pp. 196-196). It has led to institutional nihilism (Ibid., p. 203), which have we tried to explain (Ibid., p. 198) through a simple formula that actually sublimated the essence of transition (neoliberal) fraud (meta-phor). It is an extended (approximate) mathematical model: Lp + Ha + S = WPI, where AR stands for - the loss of people, Ha - help from abroad, S - smuggling and WPI - a wealth of privileged individuals.

Monistic neoliberal instrumentalization and the corresponding quasi-institutional improvisations and operationalisations are still present in some SEE countries, although economic theory and practice strongly verify the indispensable developmental need for the institutional pluralism. On the theoretical level, they are manifested through apologetic elaborations, and in practice through various forms of quasi-sociopathic type. Every monism, apologetics and fetishism in theory are counter-productive because they idealize and mystify the economic reality (Draskovic, 2016).

Neoliberal (in the institutional sense: monistic) "modelling" of economic reality was manifested through the rhetoric glorification of the alleged apsolute advantages of private property, entrepreneurial initiative, economic freedoms, effective owners, competition, unlimited markets and so-called "minimal" states. That rhetoric was accompanied by various forms of quasi-neoliberal behavior, which has socio-pathological and opportunistic origin. It was a phenomenological and

(5)

etymological ignoring of actual conditions in realizing the economic choices, and the causes of great social and economic problems, which were visible to the naked eye, and even destorted by the media (Draskovic, Bauk and Delibasic, 2016).

Essentially, the formal and informal institutions were abused, bypassed, vulgarized and reduced at different interests levels. Through the spread of opportunistic behavior, alternative institutions had parasitical and reversible impact on public policy, significantly obeying the formal and informal institutions. One of the major public policies was macroeconomic, which had neoliberal character and was supported by the apologetics of profession’s blindness (Krugman, 2009, p. 2). Consequently, there was no formation of the so-called good institutions, proposed by D. Rodrik (2005, 973). As a result, transformational fall (term by Kornai, 1994) from 1991 to 1995 was replaced by extended transition (1995 to present).

Modelling of the institutional changes in the SEE countries was strongly impacted by these negative factors. Multiple paradox of neoliberal policies caused the crisis of a system of values in economics and negative selection of the value criteria in socio-economic development. There were several valuable theoretical attempts to highlight the imperative need for modelling of institutional changes in accordance with the recommendations of NET representatives. Some authors have, often critically and competently, written about the great importance of NET in order to explain the reality of transition and some development concerns. A significant suggestion was given by M. Delibasic (2016, p. 152), which refers to the hypothetical matrix model for researching the foundation for economic development, which included the most important research parameters: property rights, public choice, institutional pluralism, relationship between formal and informal institutions, level and impact of alternative institutions, relationship between politics and economics, etc.

NET does not deny the basic and universal attributes of homo economicus: rationality, sovereignty (autonomy) in decision making, and choice, subjugation of exact budget (own interests and preferences), acting in accordance with the interests, and in the state of full awareness. However, it puts this behavior in the context of institutions as universal norms and rules of behavior that essentially act twofold: restrictively and motivationally. Therefore, the economic rationality under the influence of institutions has manifested as a limited institutional rationality (of pluralist model).

Despite these theoretical findings, analysis and recommendations of NET, in reality it all remained a dead letter, because it was neglected by the nomenclature authority, which was the creator of official economic policy (neoliberal). Regarding a numerous practical problems of "extended transition" (delay of real institutional changes) in the SEE countries from the current perspective and through the prism of many previous theoretical analysis that we conducted, we arrive to the conclusion that the modelling of existing (mutant, quasi-institutional) order was created by a privileged nomenclature authority influenced by numerous internal and external factors (Table 1). In addition to many other consequences (levels 1-5), as major and undoubted result of almost 30 year long transition in the SEE countries are weak institutions, as well as social

and economic crisis (level 6).

Civilizational path of socio-economic development has affirmed the principles of pluralism, gradualism, synergism, selective universality (in terms of using role models), and democracy. They are opposed to all the forms of absolutism, monism, uncontroled development, and party determinism.

However, SEE countries (in the absence of consistent development strategy) have opted for erroneous concepts of institutional improvisation and imitations (rather than creation), rhetoric (rather than implementation and actual change), rent-oriented and narrow-interests type of motivation (rather than profit-oriented and mass-interests), party-controlled institutional environment (rather than transparency).

(6)

Table 1. Factors impacting modelling of institutional structure in the SEE countries

Internal factors External factors

     

Socio-cultural

capital Dependency Path choice Public Globalization

Exemplary models (neoliberal ideology) Geopolitics and geoeconomics       Nomenclatures of authorities 

1 rapid and indiscriminate demolition of socialist institutions, creation of social and economic _{non-system (organizational, institutional and normative vacuum), and oligarchical new elite} 

2 continuation of autocratic political regime (the domination of politics), _{establishing a new monistic system, and government failure} 

3 asymmetry of information, the existence of powerful groups of influence, groups with special interests, active lobbyists, strong bureaucracy, imperfection of the political process, processes of decision making monopolization and the abuse



4 organized interests of small privileged groups (in accessing the resources), institutional monism, _{manipulation and social pathology, practical quasi-manifestations} 

5 opportunistic behavior, alternative institutions, increase transaction costs, violence in the society, deficit of the rule of law, weak and not transparent institutions, social disparities, and appropriate consequences



6 Weak institutions, social and economic crisis

Sources: adapted from Draskovic, 2014; Delibasic, 2016; Drachkovich, M.V., Drachkovich, V.D., Bilan, Yu., 2017; Draskovic, M., Draskovic, V., Bilan, Y., Delibasic, M., 2016.

Therefore, the alternative institutions have strengthened, hindering the real institutional evolution, acting anti-institutionally and regardless of the recommendations of the NET: not stimulating the legal behavior, nor limiting the opportunistic behavior. The outcome of neoliberal type institutional monism has led to numerous problems, inequality, and the ongoing socio-economic crisis.

3. MODELLING OF ECONOMIC INSTITUTIONS

The organisational routines of R. Nelson and S. Winter, the transaction cost theory of R. Coase, D. North’s concept of economic institutions and E. Ostrom’s institutional design, together with many other concepts, have been extensively referred to in theoretical and practical studies. That being said, no study has been carried out to date that systematises the principles and ideas of institutional level modelling into a single theory. The aim of this study is to develop an institutional theory of modelling – that is, a system of scientific principles and ideas that generalises the expe-rience and reflects the laws of the development of society within the framework of institutional economic thinking.

(7)

3.1 Institutional design

The systematisation of principles and ideas of the theory of institutional simulation should be carried out consecutively, beginning from the simplest level of simulation, i.e., institutional design, and concluding with the most complex level consisting in a description of the evolution of institu-tions. For intermediate levels of modelling, the following stages of the modelling approach can be consistently included: systematisation, formalisation, classification, distribution and measurement of economic institutions. It should be noted that economic models include such formal construc-tions, in which input and output models can be isolated, as well as the presence of a control pa-rameter – in other words, feedback. By economic institutions, in the interpretation of 1993 Nobel Prizewinner D. North (1990), we refer to the established norms of interaction between economic agents. The monitoring of the implementation of these norms is carried out either by agents them-selves, their superiors or according to regulatory procedures.

It is noted that the organisational routines of R. Nelson and S. Winter, widely used in economic modelling (Nelson and Winter, 1982), rely on a similar sense of economic institutions, to which we apply the formalism of the institutional lifecycle (Popov, 2006). An important place in the field of economic institution design belongs to the winner of the 2009 Nobel Economics Prize, E. Ostrom. Ostrom examined practices in situations where the state is not able to create institutional ar-rangements or get them to fully comply with formal rules. The sustainable existence of Ostrom’s (2000, p. 148) common-pool resources is possible only in cases where the design of the system for the operation of shared resources corresponds to a specific set of principles:

‒ presence of clear group boundaries,

‒ presence and clear specification of local resource-use rules,

‒ involvement of group members in the process of establishment and modification of rules, ‒ participation in the monitoring of compliance with the rules,

‒ gradualist approach to the implementation of sanctions, ‒ presence of conflict resolution mechanisms,

‒ minimal recognition of the right to self-organisation on the part of the authorities.

Consequently, the first scientific principle of the theory of institutional modelling should in-clude a provision stating that the design of economic institutions is based on the implementation

of specific formation rules specifying resource use similar to E. Ostrom’s principles of institutional

design.The author of this study has developed the model of institutional design of knowledge gen-eration by economic entities on the basis of the principles of institutional design together with the staff of the Institute of Economics of UB RAS (Popov and Vlasov, 2006). When constructing a mod-el of institutional design, the following stages of institutional design have been identified: analysis of the institutional knowledge generation environment; problem statement; goals and objectives; the development, implementation and updating of the institutional project; and monitoring the functioning of the institutional environment.

The first and last stages of the developed model are continuous, indicating that institutional design is a continuous activity. Continuity of institutional design, in turn, determines the flexibility of the institutional environment. The timely detection of discrepancies in the external and internal conditions of the existing institutional environment contributes to its rapid adaptation, while com-mitting fewer resources. Continuity of institutional design also reveals any institutional dysfunction in the initial stages and thus prevents a decline in their effectiveness. The stability of institutional changes in institutions under development depends on how accurately the principles of institu-tional design are taken into account and complied with.

The model allowed the authors to formalise and precisely detail the stages of institutional de-sign, while providing a platform for reducing the degree of uncertainty in this type of activity, as well

(8)

as drawing the attention of leaders to the need for accountability and the analysis of the institu-tional environment when planning the development of an economic entity. In this way, the author’s model of institutional design of knowledge generation business entities is developed on the basis of project management principles and includes such stages as the analysis of the institutional en-vironment (assuming use of the resource indicator of differentiation of knowledge, the institutional atlas model, transactional speed of knowledge growth and the coefficient of institutional develop-ment of knowledge generation); formulation of the problem, goals and objectives of institutional design; development of the institutional project (taking into account the principles of institutional design); implementation of the institutional project; its adjustment and monitoring of the function-ing of the institutional environment. The novelty of the author’s model consists in the systematisa-tion and expansion of the methodological set of tools of institusystematisa-tional design in connecsystematisa-tion with pro-cesses of knowledge generation.

The theoretical significance of the developed model consists in the synthesis of the results ob-tained as part of the dissertation research with existing management tools that can reduce the uncertainty of institutional design of knowledge-generating business entities. The practical signifi-cance of this model consists in the possibility of its use in the analysis and planning of develop-ment as a process of knowledge generation as well as in the activities of economic entities in gen-eral. Consequently, the first scientific idea of the institutional modelling theory consists in the ac-tive development of business models for the real economy based on the principles of institutional

design, for example for the generation of new knowledge.

It should be noted that the practical implementation of the scientific concept leads to the de-velopment of methods of evaluation of knowledge generation in the enterprise.

3.2 The Systematisation of Institutions

The most successful experience of the systematisation of economic institutions to date is G. Kleiner’s (2003) system-integrated theory of the enterprise. In the system-integration model, all factors (in essence, economic institutions) are divided into seven levels from the mental activities of the participants in the activities of the enterprise to the experience of the functioning of the market. The systematisation of economic institutions can also be based on the market potential model of the enterprise. Elements of the enterprise market potential can be structured according to the four functions of management – planning, organising, directing, controlling – and the three types of activity of the enterprise, consisting of analysis, manufacturing and communications. At the same time, economic institutions can be classified according to their use of four types of re-sources: human, material, financial, information.

In both models, the institutions are grouped by the criteria of the specific functions that they perform. Thus, the second scientific principle of the theory of institutional modelling can be formu-lated as follows. The systematisation of economic institutions should be based on defined system

performance criteria, releasing various functions of institutions, similar to G. Kleiner’s theory of

levels of functional system-integration or elements of the market potential of the enterprise. What are the possible approaches to the classification of micro-economic institutions? We may note in passing the classification approaches taken by O. Favro’s (2000) positioning theory on a two-coordinate plane, O. Williamson’s (1979) hierarchical “objectives tree” system and G. Kleiner’s pyramidal representation of the systematisation factors of the enterprise, etc.

Since the basic characteristics of institutions consist in the exogeneity or endogeneity of their formation and use, and the dissemination of these institutions in the performance of individual employees or the enterprise as a whole, the graphical representation of the microeconomic classi-fication of institutions can be represented in the coordinates “institutional exogeneity /

endogenei-ty – belonging to the employee / company” (Popov, 2012). The obtained classification illustrates

(9)

evolution of micro-economic institutions can be analysed within the framework of institutional-evolutionary micro-economic theory. Only when relying on a science-based formation of the institu-tional structure of the economic system can the correct economic decisions be taken to ensure the predictability of economic results.

It should be noted that the fruitfulness of the idea concerning the unity of the analysis of eco-nomic systems based on synthetic evolutionary theory consists in allowing institutional approaches to be distributed in the field of evaluation of the social sphere of society; in other words, it signifi-cantly expands the scope of proper economic analysis. The system classification of economic insti-tutions reveals the saturation, vector and the basic block of the development of institutional eco-nomic theory. Thus, the second scientific idea of the theory of institutional modelling consists in

the possibility of classifying economic institutions according to the coordinates that distinguish exogenous or endogenous institutions and whether ownership is concentrated in individuals or groups of individuals, like O.Favro’s classification theory or classification according to

micro-economic institutions.

The practical significance of the classification of economic institutions is in the development of techniques for the management of institutional effects. For example, the proprietary methodology for controlling endogenous opportunism in the “principal – agent” system was formed within the given direction.

3.3 Distribution of Institutions

The distribution model for economic institutes can be presented in the form of a hierarchy of rules according to J. Buchanan. Buchanan (1962), who won the Nobel Prize in Economics in 1986, was not representative of classical institutionalism. However, his researches, devoted to methodo-logical individualism and the evaluation of policy as a process of exchange, largely relied on the institutional analysis of economic activity. Based on an account of the interests of politicians, Bu-chanan called for the formation of the constitution of economic policy, i.e., a set of rules that de-fine the restrictions on the activities of certain individuals. We note that neo-institutional theory of public choice has to a large extent been formed on the basis of the works of J. Buchanan. In other words, Buchanan postulated a hierarchy of economic institutions from the basic institutions in the form of state laws to rules that are guided by individuals. Consequently, the third principle of insti-tutional modelling theory consists in the modelling of the distribution of economic institutions

be-ing possible on the basis of functional data content hierarchy of established norms of interaction between economic agents, resembling Buchanan’s distribution of politico-economic institutions.

The model of distribution of economic institutions in the form of a hierarchical structure con-sists of an institutional atlas. Since the atlas in the conventional sense is a multifactorial, hierar-chical system characteristic of the object of study, the institutional atlas under the framework in this work will involve a summary classification of institutions, which combines several types of sys-tematisation of these institutions according to various criteria. The hierarchical syssys-tematisation of institutions is possible according to the following criteria: place of origin, areas of expertise, control functions and areas of activity. Endogenous institutions can be distinguished from exogenous insti-tutions according to place of origination, with the former arising inside of the object and the latter formed outside of the object. It is expedient to distinguish between institutions (e.g. development institutions) in terms of areas of knowledge, i.e. social, technological, economic, political and cul-tural.

Institutions of planning, organising, stimulation and control can be distinguished in terms of their control functions. Norms of interaction between economic agents may be divided according to areas of activity into the institutions of production, distribution, sale and consumption. The above systematisation criteria form an atlas of institutions of development in which they are presented in a certain order. Hence, the third scientific idea of institutional theory of modelling consists in the

(10)

distribution of hierarchical institutions be capable of representation in the form of an institutional

atlas, structuring institutions according to the function of fulfilling norms of interaction between economic agents, similar to the formation of an atlas of institutions of development.

The selected research idea was aimed at developing methods for determining weaknesses in the institutional structure based on a comparison of actual and theoretically possible institutional atlases. For example, a study conducted by the Institute of Economics of UB RAS in 2008-2009 revealed a lack of development of the system of development institutions in the Sverdlovsk region, especially in the areas of institutions of planning and promotion.

3.4 Measurement of Institutions

At the basis of the measurement of economic institutions is 1991 Nobel Economics Prizewin-ner Ronald Coase’s theory of transaction costs. The introduction of transaction costs allowed Coase (1937) to designate the boundaries of the firm from the in-house comparison and market costs, as well as the need for the intra-firm planning of economic activity. In his famous article “The Nature of the Firm”, he wrote: “In a system based on competition, there must be some optimal

level of planning. This is due to the fact that the company, being a small planned association, could only continue to exist in the case of fulfilment of the coordinating functions at a lower cost than those that are required in the implementation of co-ordination by market transactions, and if these costs are lower than those costs in other firms. To have an effective economic system, it is not only necessary to have markets, but also for there to be planning within organisations”. Thus,

R. Coase has established the relationship of the institutional structure and transaction costs. Hence, the fourth principle of the theory of institutional modelling is that the institutional structure

of the economic system can be measured by the cost of transactions in the formation and mainte-nance of given economic institutions, in like manner to Coase’s assessment of transaction costs of

institutions of the firm.

K. Arrow (1961) defined transaction costs as the operation costs of the economic system. Ar-row compared the action of transaction costs in the economy with the effect of friction in physics. On the basis of a similar assumption, the inference can be made that that the nearer the economy to the general equilibrium model, the lower the level of transaction costs obtaining in it, and vice versa.

In the interpretation of D. North (1991), transaction costs “consist of the costs of assessing the useful properties of the object of exchange and the costs of ensuring rights and coercion to comply with them.” These costs may serve as a source of social, political and economic institu-tions. Based on the representations of K. Arrow and D. North, we assume that the economic

valua-tion of the institute consists in the transacvalua-tion costs relating to the formavalua-tion and maintenance of the established norms of interaction between economic agents. This position can be the

formula-tion of the fourth scientific idea of the theory of instituformula-tional modelling.

It should be noted that the transactional theory of economic institutions can be formulated on the basis of the above considerations, which includes the ability to model the transactional func-tions. An analysis of published studies on the introduction of the function of transactions shows that, apparently, a clear representation of the form of such a function can be based on the classi-cal definitions of the essence of transaction costs, with the developed relations being verified sub-sequently. The classic definition of transaction costs belongs to T. Eggertsson (2001): “In general terms, transaction costs are the costs that arise when individuals exchange ownership rights to economic assets and enforce their exclusive rights.” However, he also notes that a clear definition of transaction costs does not exist, since in neoclassical theory there is no correct determination of the production costs. R. Matthews proposed the following definition: “The fundamental idea of transaction costs is that they consist of the costs of drawing up and conclusion of the contract, as well as the costs of supervision over compliance with the contract and ensure its implementation,

(11)

as opposed to production costs, which are the costs of the actual performance of the contract” (Matthews, 1986).

Recent definitions allow three key dependencies of transaction costs to be derived from the parameters of economic systems. According to Eggertsson, transaction costs are directly propor-tional to the number of economic agents entering into contracts with each other. However, in ac-cordance with the definition of Matthews, transaction costs are inversely proportional to the num-ber of contracts and established norms that ensure the implementation of these contracts. If we assume contracts to refer to formal institutions, but norms ensuring the implementation of these contracts are understood as informal institutions, it is possible to qualitatively simulate the de-pendencies of transaction costs on major institutional parameters of economic systems. In this case, the exogenous firm transactional function will have the form of transaction costs proportional to the number of counterparties of the firm and data costs inversely proportional to the number of formal and informal institutions that ensure the relationship between the firm and its counterpar-ties.

The object of the theory of transaction costs is to explain the problems of the effectiveness of certain economic transactions in a specific institutional framework, i.e. the ability of different or-ganisational forms to carry out effective planning and implementation of economic goals. The basis of this theory is the assumption that any action in the economic context is primarily due to costs. In general terms, transaction costs are costs that arise when individuals exchange ownership rights to economic assets and ensure their exclusive rights. Like other costs in economics, transaction costs are opportunity costs; as such, they can be either constant or variable.

R. Matthews (1986) proposed the following definition: “The fundamental idea of transaction

costs is that they consist of the costs of drawing up and conclusion of the contract, as well as the costs of supervision over compliance with the contract and ensure its implementation, as opposed to production costs, which are the costs of the actual performance of the contract”. Therefore, in

accordance with Matthews’ views, transaction costs are all non-manufacturing costs met by busi-ness entities. Among the various activities that require certain transaction costs, Eggertsson (2001) included a number of non-production costs. At the level of the firm, a determination of transaction costs may have a strict quantification. The main feature of the separation of transac-tion and transformatransac-tion costs is the type of operatransac-tion that is applied to resources, leading to the appearance of various costs. Thus, transformation costs appear as a result of the transformation of resources. According to the definition of transformation costs, the transformation of resources can be seen in terms of a physical change to the material. Transaction costs are incurred as a re-sult of the exchange of resources. Resources in this case do not change their physical characteris-tics; however, a reallocation of property rights may take place in this connection.

In terms of an alternative attribute of allocation of transaction costs, it is possible to refer to the nature of these costs. Thus, if the costs arise as a result of uncertainty, the bounded rationality of individuals or opportunistic behaviour, they can be attributed to transactions. In this case, transaction costs consist in the loss of the presence and actuation of the factors listed above, as well as the attempt to anticipate them, i.e., as losses due to risk and costs of insuring risk (Knight, 2003). The attributes discussed above make it possible to divide the transaction and transfor-mation costs, but requires a more specific division of the costs in order to support an analysis of the transaction costs of the production plant. Transformational and transactional costs should be contained within in a single system of organisation of production, in which both the former and latter are strictly defined. This need is due to the necessity of accounting and analysis of transac-tion costs.

The analysis of types of transaction costs in the organisation allows the formulation of an algo-rithm of allocation of transaction costs as follows:

(12)

‒ determine which types of resources are converted into which products within the core busi-ness;

‒ determine the type of process to which costs are allocated;

‒ if the costs are the costs of the main process, determine whether the costs are costs of trans-actional areas using a sign of the type of operations performed on resources and the nature of the costs;

‒ make the final decision about the type of transaction costs. The authors’ algorithm of the calcu-lation of transaction costs permits the obtaining of the empirical dependency of the dynamics of publication activity and scientific mobility on changes in the transaction expenses of aca-demic establishments.

3.5 The Evolution of Institutions

A significant number of foreign and Russian studies are devoted to model representations of the evolution of economic institutions. To the prominent domestic developments should be includ-ed V. Polterovich’s reform theory, B. Mayevski’s macrogeneration theory and the self-development theory and systems of A. Tatarkin. Polterovich’s (2013) reform theory describes the optimal se-quence of the development of the institutional structure of society with the implantation of eco-nomic institutions from the outside in terms of avoiding the formation of institutional traps. B. Pol-terovich’s creation of the theory of institutional traps (Polterovich, 1999) enabled the effects of reforms of the Russian economy to be modelled and forecast. On the basis of the principles of coordination, training, cultural inertia, hysteresis and other effects of the formation of institutional traps, an evaluation of the application of certain economic innovations became possible: for ex-ample, the well-known position of Polterovich against the introduction of mortgage banking in the Russian context in favour of the introduction of savings and loan banks. This position was articu-lated prior to the introduction of mortgage lending in the Russian practice of housing construction. However, the mathematical evaluation of the expected results was carried out precisely on the basis of institutional modelling.

V. Mayevsky’s and M. Kazhdans (1998) theory of macrogenerations is based on a modelling of the cyclic changes in gross domestic product due to the cyclic introduction of new technological innovations in the real economy. The theory of microgeneration is based on the principle of evolu-tionary change in the institutional structure when implementing innovations. The general principle uniting the theory outlined above consists in a modelling of the evolution of economic institutions based on a consideration of resource potential and forming the institutional structure of the ana-lysed system. Consequently, the fifth principle of institutional modelling theory comprises a

simula-tion of the possible evolusimula-tion of institusimula-tions on the basis of a formalisasimula-tion of resource potential and existing institutional infrastructure of the economic system, similar to the modelling approach

of Polterovich’s reform theory and the theory of macrogenerations of V. Mayevsky.

We note that the core institutional description of economic systems consists in the evolution-ary nature of the institutional structures. In this sense, the contemporevolution-ary institutional theory is closely aligned with the evolution of economic theory and can thus be considered as forming a single entity – the institutional-evolutionary theory. At the same time, the results of an empirical study revealed a graph of the evolution of a number of economic institutions: the family and life experience of workers, informal relations, corporate culture, communication out of work hours, the personal appearance of the workers, licensing and training of workers, professional education, research activities, innovation, automation, enterprise management style and realisation of pro-duction. Those factors controlling the evolution of economic institutions include endogenous fac-tors – the life cycle phase, area of activity, period of existence, number of employees, percentage of coverage of employee job descriptions – as well as exogenous factors – the impact of external authority and control of the frequency of the company activities (Popov, 2006).

(13)

Hence, the fifth scientific idea of the theory of institutional modelling consists in the fact that

simulation of the evolution of economic institutions is possible by evaluating the impact of exoge-nous and endogeexoge-nous factors on the dynamics of changes in these institutions, by analogy with

the study of the control factors of the evolution of economic institutions. The applied use of model-ling the evolution of institutions is connected with the development of economic and mathematical models of evolutionary processes. The authors of this study have developed an analytical model of the evolution of economic institutions on the basis of the mathematical apparatus of diffusion pro-cesses based on previously obtained empirical results of the study of temporal changes of transac-tion costs. The exact solutransac-tion of a diffusion model of the evolutransac-tion of economic institutransac-tions sug-gests sinusoidal dynamic changes of transaction costs and reducing the value of these costs at the end of the life cycle of the economic institution. The solution of the developed model confirms the-oretical hypotheses about the wave-like dynamic of the transaction costs and existence of life cy-cles of economic institutions. The scientific novelty of the developed model consists in an analyti-cal representation of the temporal dynamics of transaction costs, receiving a partial graphianalyti-cal rep-resentation in the works on evolutionary economics of R. Nelson and S. Winter. The table below shows the basic principles and ideas behind the discussed theory.

Table 2. Principles and ideas behind the theory of institutional simulation

Level of modelling Scientific principle Scientific idea Application

Design institutions

Compliance with rules of formation that describe the

specification of the use of resources

Modelling on the basis of principles of institutional-functional design Methods of institu-tional-functional knowledge generation design Systematisation institutions

Simulation based on the criteria of system perfor-mance, which delineate the

various functions of institu-tions

Classification according to coordinates “exogeneity / endogeneity of institution

and ownership to individu-als or groups of individuindividu-als

Procedure for control of endogenous oppor-tunism in the “principal – agent” system Distribution of Institutions

Modelling based on a hier-archy of the functional filling of established norm

data

Hierarchical distribution in the form of institutional atlas, structuring institu-tions according to estab-lished norm data functions

Methods for determin-ing weaknesses in the institutional-functional

structure

Measurement of institutions

The institution-functional structure of the system

measured in terms of transaction costs

Economic evaluations of the institution consisting in

transaction costs

Methodology allocation of

transac-tion costs in the fi-nancial statements

Evolution of insti-tutions

Modelling on the basis of the

formali-sation of the resource po-tential and existing

institu-tional structures

Modelling of the impact of exogenous and endoge-nous factors on the

dynam-ics of changes in institu-tions Economic-mathematical models of evolutionary pro-cesses

CONCLUSION

The process of transitional development began long ago. However, most countries in transition still lack the environment for a satisfactory response due to destructive tendencies, which dominate over creativity. A high price has been paid for neoliberal failures and greedy experiments of self-proclaimed „visionaries“ related to the deficit of legal state and surplus of authority over the people.

(14)

Successful implementation of transition depends on the existing social, economic, political and institutional conditions and constraints. Good results are possible only through positive change of values and corresponding mindset and behavior in terms of civilizational achievements. This progress is contrary to dogmatization, apsolutization, mythologization, improvisation, self-regulation and monistic choices. Unfortunatelly, distributional coalitions have created enormous wealth by carteling, and substituting the promised markets by monopolist quasi-competition, and unlawful ways of appropriating the state property and/or rent. They have developed a parasitic influence on public policy. That way, the party in power determines an institutional matrix of the state, politics and society.

Thus, the formation of the theory of institutional modelling as a system of scientific principles and ideas as part of the institutional economic thinking has allowed the following theoretical and practical results to be obtained. Based on the research of previous foreign and Russian scientists, the scientific principles behind the rules of constructing institutions in the design phase are high-lighted, modelling on the basis of a systematic presentation of the criteria of functionality, model-ling based on the hierarchy of institutional functions, measuring the institutional structure of transaction costs, modelling based on the formalisation of the resource potential and existing insti-tutional structures.

Based on the author’s developments, scientific ideas of modelling based on the principles of institutional design are formulated, institutions are classified according to the coordinates “exoge-neity / endoge“exoge-neity – worker / enterprise”, a hierarchical distribution of institutions in the idea of institutional atlas is carried out, economic institutions are evaluated according to transaction costs and modelling of the impact of exogenous and endogenous factors on the dynamics of changes in institutions is presented.

The application of the theory of institutional modelling techniques is gained in the institutional design of knowledge generation, management endogenous opportunism in the “principal - agent” system, identifying weaknesses in institutional structures, allocation of transaction costs in the financial statements and economic-mathematical models of evolutionary processes. The formed institutional modelling theory is an effective method for investigating the laws of society from the standpoint of institutional economics.

ACKNOWLEDGMENT

The study was financially supported by the Russian Science Foundation at Udmurt State University (Izhevsk, Russia), project No. 15-18-00049.

REFERENCES

Arrow, K.J. (1961), “Capital-Labor Submission and Economic Efficiency”, Review of Economics and

Statistics, Vol. 43. pp. 56-70.

Blaug, M. (1994), Economic Theory in Retrospect, Delo, Moskva (in Rossian).

Buchanan, J.M., Stubblebine, W.C. (1962), “Externality”, Economica, Vol. 29, No. 10, 371-384. Buchanan J. М., Robert D.T, Tullock G. Eds. (1980), Toward a Theory of the Rent-Seeking Society,

Texas A&M University Press, College Station.

Coase, R.H. (1937), “The Nature of the Firm”, Economica, 1937. Vol. 4, No. 10, pp. 386-405. Cheung, S. (1983), „The Contractual nature of the Firm“, Journal of Law and Economics, Vol. 26, No.

1, pp. 1-21.

Ciegis, R., Dilius, A., Mikalauskiene, A. (2015), “Evaluation of Economic Growth in Terms of Sus-tainability”, Transformation in Business and Economics, No. 14(1-34), PP. 105-126.

(15)

Delibasic, M. (2016), “Hypothetical Matrix for Institutional Modeling of the Basis for Economic De-velopment in the Countries of Southeast Europe”, Montenegrin Journal of Economics, Vol. 12, No. 2, pp. 147-159

Demsetz H. (1967), „Toward a Theory of Property Rights“, American Economy Review, Vol. 57, No. 2, pp. 347-359.

Draskovic, M. (2016), “Roots and Paradoxes of Neoliberal Apologetics”, Economics & Sociology, No. 9(1), pp. 209–219.

Draskovic, M. (2017), „Possibilities and Limitations of Neoinstitutional Economic Theory in Explai-ning the Transition Crisis – the Case of Montenegro“, Transformations in Business &

Economics, Vol. 16, No. 2.

Draskovic, M. (2017a), “Levels And Factors of Transitional Crisis in Bosnia and Herzegovina, Mon-tenegro, and Serbia”, Economics and Sociology, Vol. 10, No. 2.

Draskovic, M., Bauk, S., Delibasic, M. (2016), “Testing the Level and Factors of Institutional Ra-tionality in Montenegro, Serbia and Bosnia and Herzegovina”, Economics and Sociology, Vol. 9, No. 2, 22-40.

Draskovic, M., Draskovic, V., Bilan, Y., Delibasic, M. (2016), „Neoliberalism as Quasi-Institutional Monisms and Causes of the Crisis in South-Eastern Europe“, Transformations in

Business & Economics, Vol. 15, No. 2Bb (38B), pp. 755-765.

Drachkovich, M. V., Drachkovich, V. D., Bilan, Yu. (2017), „Social Institutional Factors of Slow-Down: the Case of South-East European Countries Development“, Socis, No. 4, pp. 103-111 (in Rossian).

Draskovic, M., Bauk, S., Streimikiene, D., Draskovic , V. (2017), “Testing the Level of Alternative Institutions as a Slowdown Factor of Economic Development: the Case of Montenegro”,

Amfiteatru Economics, Vol. 19, No. 2.

Draskovic, V. (2014), Neoliberal metaphor as a quasi-economic paradigm in function of vulgarized

institutional monism and an experiment of interest“, SPH, Celje – Osijek – Czestochowa –

Ko-tor.

Draskovic, V., Draskovic, M. (2012), „Institutional Nihilism of the Post-Socialist Transition“,

Monte-negrin Journal of Economics, Vol. 8, No. 2, pp. 191-206.

Dush, R. (1993), „Tolerating Economic Reform: Popular Support for Transition to a Fre Market in the Former Soviet Union“, American Political Science Review, No. 87, 590–608.

Eatwell, J. et al. (1995), Transformation and Integration: Shaping the Future of Central and Eastern

Europe, Institute for Public Policy Research, London.

Erznkyan, B.H., Delibashich, M., Grgurevich, N. (2014), „Institutional Behavior: Theoretical Issues and Practical Realization“, Economics of Contemporary Russia, No. 4 (67), pp. 19–30 (in Rossian).

Eggertsson, T. (2001), Economic Behaviour and Institutions, Delo, Moskow (in Russian). Favro, O. (2000), “Economy of Organisations”, Questions of Economy, No. 3, pp. 5-20.

Fernandez-Guadano, J. (2015), “Employee-Owned Firms: a Business Model of Social Economy with Potential”, Transformation in Business and Economics, Vol. 14, NO 2 (35), pp. 191-204. Friedman, M., Friedman, R. (1996), Freedom of choice - a personal statement, Global book, Novi

Sad (in Serbian).

Gofman, E. Asiles (1968), Etudes sur la conditions sociale des malades mentaux et autres reclus, Paris

Infante, D., Smirnova, J. (2016), “Environmental Technology Choice in the Presence of Corruption and the Rule of Law Enforcement”, Transformation in Business and Economics, No. 15(1-37), PP. 214-228.

Kleiner, G. (2003), “Evolution and Modernization of the Theory of the Firm”, The 5th_{International}

Symposium on Evolutionary Economics, Institute of Economics, Pushchino. Moscow.

Knight, F. (2003), Risk, Uncertainty and Profit, Delo, Moskow (in Russian).

Kornai, J. (1994), “Transformational recession: The Main Causes”, Journal of Comparative

(16)

Maevsky, V., Kazhdan, M. (1998), “The Evolution of Macrogenerators”, Journal of Evolutionary

Economics, No. 4. pp. 407-422.

Matthews, R.C.O. (1986)) “The Economics of Institutions and Sources of Growth”, Economic

Jour-nal, 1986. Vol. 96, No. 12, pp. 903-910.

Marcouiller, D., Young, L. (1995), „The Black hole of graft: the predatory state and the informal econ-omy", American Economic Review, Vol. 85, No. 3, pp. 630-646.

Mc Auley, A. (1991), Market Failure Versus State Failure: the Scope for Privatization in a Planned

Economy, EACES Workshop, Trento.

North, D.C. (1981), Structure and Change in Economic History, W. W. Norton & Co., New York. North, D.C. (1984), „Transaction cost, institutions, and economic history“, Journal of Institutional

and Theoretical Economics, Vol. 140, No. 1, pp. 7-17.

North, D.C. (1987), „Institutions, transaction cost and economic growth“, Economic Inwuiry, Vol. 25, No. 3, pp. 418-432.

North, D.C. (1994), „Economic Perfomanse through Time“, American Economic Review, Vol. 84, No. 3, pp. 359-368.

North, D.C., Thomas R. (1973), The rise of the Western world: a new economic history, Cambridge University Press, Cambridge.

North, D.C., Walis, J.J., Weingast, B.R. (2009) Violence and Social Orders – A Conceptual

Frame-work for Interpreting Recorded Human History, The Syndicate of the Pres of the Cambridge

University, Cambridge.

Oppenheimer, F. (1922), The State its Filstory and Development Viewed Sociologically, Vanguard Press, New York.

Nelson, R.R., Winter S.G. (1982), An Evolutionary Theory of Economic Change, Harvard University Press, Cambridge, MA.

North, D.C. (1990), Institutions, Institutional Change and Economic Performance, Cambridge Uni-versity Press, Cambridge, UK.

North, D.C. (1991), ”Institutions”, Journal of Economic Perspectives, No. 5, pp. 97-112.

Ostrom, E. (2000), “Collective Action and the Evolution of Social Norms”, Journal of Economic

Per-spectives, Vol. 2, No. 3. pp. 137–158.

Polterovich V.M. (2013), “General Institutional Analysis and Design of Reforms”, Journal of the New

Economic Association, No. 1 (17), pp. 185-188.

Polterovich, V.M. (1999), “Institutional Traps and Economic Reforms”, Economics and

Mathemati-cal Methods, T. 35. No. 2. pp. 3-20.

Popov, E.V. (2006), “Theory of Evolution in the Mini-Economic Institutions”, Montenegrin Journal of

Economics, Vol. 2. No. 3, pp. 57-73.

Popov, E.V., Vlasov, M.V. (2006), “Institutional Analysis of Production Processes for New Knowledge”, Montenegrin Journal of Economics, Vol. 2. No. 4, pp. 35-51.

Popov, E.V. (2012), “Transactions & Institutions”, Montenegrin Journal of Economics, Vol. 9, No. 2, pp. 115-124.

Rodrik, D. (2005), “Growth Strategies” In Handbook of Economic Growth, Ph. Aghion and S. Durlauf eds., Elsevier, Amsterdam, pp. 967-1014.

Scekic, R., Draskovic, M., Delibasic, M. (2016), „Neoliberalism in a Function of Geoeconomics in the Case of Southeast Europe“, Journal of International Studies, Vol. 9, No 1, pp. 66-75. Sueldo, M., Streimikiene D. (2016), “Organizational Rituals as Tools of Organizational Culture

Crea-tion and TransformaCrea-tion: A Communicative Approach”, TransformaCrea-tion in Business and

Eco-nomics, Vol. 15, NO 2 (38), PP. 89-111.

Vveinhardt, V., Andriukaitiene, R. (2015), “Determination of the Level of Management Culture and Social Responsibility in a Regional Organisation of Local Self-Government”, Transformation in

Business and Economics, Vol. 14, NO 2 (35), pp. 204-224.

Williamson, O.E. (1979), “Transaction Cost Economics: the Governance of Contractual Relations”,